How cash flow management can help SMEs prosper

According to various studies, the Indian economy is typically risk-averse.

How cash flow management can help SMEs prosper
What is the one thing which worries you today in the financial world? For most, it’s the life after earning stage, and security of certain regular cash flow to meet the needs and expenses. (Reuters)

According to various studies, the Indian economy is typically risk-averse. Many believe the average Indian’s inherent fear of taking risk dates back to ancient times and the epic tradition; in the Mahabharata, Yudhisthira’s tragic flaw was his love for the game of dice. He loved the thrill of the challenge so much that he risked all, despite knowing what was at stake. It ultimately led him to lose all—his kingdom, his brothers and his freedom.

Risk, however, is one of the foremost tenets on which a robust business is built. Without taking calculated risks, it is unlikely that one will be able to expand one’s scale and fulfil one’s true potential. So, the tendency amongst Indian SMEs to avoid accessing growth capital because of associated risks is not a sound business approach. This not only limits their exposure to failure, but also the ability to succeed.

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In order to be able to take sufficient risks and maintain a healthy financial profile, it is imperative for SMEs to put in place sound cash flow management practices for themselves. Robust cash flows offer protection against market volatility and possible setbacks in the future. In a typical business scenario, healthy cash flows are when the inflow of cash is greater than outflow. This ensures the business does not have to cut down on necessary activities like inventory expansion, advertising, marketing, tapping newer business segments, etc. Healthy cash flows are important for maintaining a good credit score, paying off vendors and employees on time, maintaining good relationships with various stakeholders, and running the business smoothly.

Unfortunately, in India, late payment cycles often put cash flow management of SMEs in a veritable tizzy. A recent IFC report states that 35% of Indian SMEs receive their payments only 90 days after the products have been delivered or services rendered. This means that at any given point of time, much of the revenue of the SME that should ideally be accessible is locked up as receivable. The SME then has to either postpone its critical business moves or it may even default on its own payments as its cash flow has been set askew.

So, how to maintain cash flows well?

There are several strategies that SMEs in India can adopt to strengthen cash flows. They must look at improving their cash receivables in tangible ways. Collecting funds in a manner that doesn’t put them in a cash crunch is imperative. It is essential to be prompt in issuing invoices and following up on payments. SMEs can look at ways of incentivising timely payments by offering discounts to clients and customers who pay before time and by charging a penalty to those who dilly-dally with payments. Businesses themselves must keep a steady eye on their payments and avoid default fees, etc. Building strong relationships with vendors who can allow for some leeway in case the SME is running late on making a payment is also a good way to maintain cash flows.

Next, efficient stock management is imperative for managing a healthy cash flow balance. Businesses must analyse what products are most in demand during what business cycles and regulate their SKUs in accordance. Having surplus of a certain item and shortage of one that can drive sales can have a serious impact on the finances of a business.

Modulating product prices or service rates according to market conditions and costs is of prime importance. Not increasing prices due to fear of loss in business is another example of unhealthy risk aversion. If raw material costs or those associated with running the business are escalating, the selling prices must also be tweaked accordingly in order to bolster cash flows.

Often, however, the only way for an SME to have cash to meet all necessary expenses, especially when it’s in a state of super-fast growth, is easy access to working capital loans. Many Indian SMEs feel hesitant towards raising growth capital without realising that taking a risk of that measure can help them seize opportunities at the right time. Timely finance can allow SMEs to overcome issues in cash flow management such as those arising out of late payments, unforeseen expenses or expenses arising on the back of expansion plans. By leveraging cost-effective working capital, SMEs can streamline their finances well and nurture growth even in times when they may not have as much cash in-flow as expected.

Indian SMEs are a storehouse of potential. As per a recent report by SME Chamber of India, they contribute 8% to GDP, besides 45% to the total manufacturing output and 40% to exports. These figures are only expected to rise significantly. By managing their finances with a greater degree of efficacy and a strict eye on inflows and outflows, SMEs can strengthen their operational, economic and infrastructural backbone. They must look beyond traditional ways of managing their financial health and consider innovative and modern approaches to ensure seamless supply of funds and boost their growth as a result.

The author is VP, Credit & Operations, Lendingkart Technologies

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First published on: 23-06-2016 at 06:12 IST